Alabama Governor Fails to Prevent County’s Record $4 Billion Bankruptcy Filing
By MARY WILLIAMS WALSH
Last-ditch efforts by the governor of Alabama to prevent a record-breaking municipal bankruptcy in his state broke down on Wednesday, as the Jefferson County Commission voted 4 to 1 to declare bankruptcy on roughly $4 billion of debt.After the vote, lawyers for the county filed a Chapter 9 petition in federal bankruptcy court in Birmingham, Ala., according to one of the lawyers.
At $4 billion, Jefferson County’s bankruptcy eclipses the $1.7 billion bankruptcy filing by Orange County, Calif., in December 1994, the previous record. Jefferson County’s debt grew out of poorly conceived efforts to finance a court-ordered rebuilding of its decrepit sewer system. The county used a complicated combination of debt instruments and derivatives that was supposed to save money, but it failed in 2008, leaving it with more debt than it could repay.
David Carrington, the County Commission’s president, apologized to Alabama’s other towns and counties as he cast his vote for bankruptcy. He said he knew that a municipal bankruptcy in one part of the state could harm the credit ratings of others, but he said Jefferson County simply had no other choice.
“The county has negotiated extensively and in good faith with its creditors,” he said. “Those negotiations have not produced a deal that fairly treats the county and its citizens, and there is no reason to believe that further out-of-court negotiations will lead to a fair, acceptable result.”
George Bowman, the only county commissioner to vote against the Chapter 9 filing, said the county needed debt relief, but he did not think bankruptcy court was the right place to seek it. Chapter 9 of the bankruptcy code assumes municipal debt is legitimate and simply needs to be adjusted. Mr. Bowman said he did not think the transactions that created Jefferson County’s debts were legal in the first place.
Jefferson County has been considering bankruptcy for several years, and it came within hours of doing so this year, amid rising popular anger over a proposal to sharply raise sewer rates. In September, Gov. Robert Bentley, a Republican, intervened, proposing what appeared to be an acceptable plan to restructure the debt without the aggressive rate increases or bankruptcy.
The deal called for replacing the county’s existing debt with new securities, with a lower face value and easier terms. An important element was to be a commitment, by the state, to step in and help the county stay current on paying down the bonds if it got into trouble again.
Members of the County Commission said at the time they appreciated the governor’s coming to the rescue, and wanted to work with him on the details of the plan. But before long, a rift between the county and its creditors began to open, and this week it proved impossible to bridge.
Participants in the municipal bond market said they thought the new bonds would not be secure enough to attract buyers at an affordable rate of interest. They said there were too many chances of the county’s sewer revenues coming up short, and said the plan did not give the county enough power to raise sewer rates in such a case. That meant there might not be enough money to pay the bondholders.
Matt Fabian, of Municipal Market Advisors, also said he was surprised to see the county’s creditors trying to compel all new homes in the county to join the sewer system, to swell the rate base.
“It’s something they should have done 50 years ago, but putting it on there now was a problem,” he said. “The value of all new property would drop.”
Mr. Fabian said investors were also wary of the Alabama’s “moral obligation” to help Jefferson County honor its debts, because it did not involve a pledge of new money from the state.
Kenneth N. Klee, a lawyer representing the county, told reporters after the vote that he expected the court to hold its first hearing in the case on Thursday morning.
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